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Uncertain future for Fed's SCCL rules

01 February 2017

Trump administration has created uncertainty around regulatory initiatives

Plans for single-counterparty credit limits (SCCL) are among the most likely rules to be scrapped, delayed or severely watered down by the Fed under the new US political administration, legal experts suggest.

The proposals, part of Dodd-Frank, place buffers on excessive credit exposures between the major systemically important US banks and were set to be phased-in during 2017 and 2018. 

Net credit exposure of securities finance transactions (SFTs), including securities lending and repo trades between entities, are taken into account.

A PwC whitepaper published in October said it would be an "uphill battle" to get Fed officials to change their mind on parts of SCCL.

It also pointed out that the SCCL methodology around SFTs could cause exposure amounts to increase dramatically for securities lending a repo products.

However, Trump's surprise election win and his administration's uncertain impact on regulatory initiatives may mean SCCL rules are cancelled, eased or postponed at the very least.

"It’s all speculation at this stage," a securities lending legal expert, who wished to remain anonymous, told Global Investor/ISF at the IMN Securities Finance event in Florida this week.

"However, SCCL is certainly one of the regulations which will be reviewed. There could be a major reversal or part-reversal under the new administration."

If the rules were to be implemented, major US banks will have to diversify exposures and seek counterparties that may receive favorable treatment in the exposure calculation

Industry groups, including derivatives trade body ISDA, said last year’s SCCL re-proposals from the Fed contained "significant flaws and weaknesses".

It added that the plans would potentially unnecessarily restrict securities financing and certain other transactions, which could have substantial unintended negative consequences for markets.

ISDA also urged alignment with the Basel Committee’s own large exposures framework where appropriate as a US policy matter.

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